Australian dollar forecast: AUD hovers near two-year lows despite fifth RBA hike

The Australian dollar (AUD) has seen weakness against the world’s reserve currency the US dollar (USD) in 2022, hurt by the Reserve Bank of Australia’s reluctant approach to hiking rates at the start of the year.

On 6 September 2022, the Reserve Bank of Australia (RBA) hiked rates for a fifth month in a row, in a bid to catch up with the US Federal Reserve (Fed) amid prolonged inflationary pressures. 

The market reacted tepidly to the RBA’s latest 50 basis points (bps) rate hike as the AUD/USD exchange rates hovered near its two-year lows on 6 September. Additionally, selling pressure on the Aussie, a commodity currency, has increased in the face of global economic slowdown and easing commodity prices in recent months.

Can the AUD make a comeback in 2022 or will it slip further? Let’s take a deep dive into learning about the Australian dollar and the factors that could affect its exchange rates against other major currencies. You will also find expert commentary and Australian dollar forecast for 2022 and beyond from analysts.

Price action: Australian dollar performance 

Back in March 2020, the Australian dollar crashed to its lowest point against the US dollar in over 18 years, as the Covid-19 pandemic pushed the world into lockdown. The Aussie lost over 12% in the first quarter of 2020.

Having bottomed at a near two-decade low of 0.55 against the US dollar in March 2020, the Aussie would see a stellar rebound over the next 12 months. 

The AUD/USD rate surged about 45% from its March 2020 bottom to a near three-year high of 0.8 by February 2021, supported by recovering commodity and energy demand outlook.

Since then, the Aussie has been on a steady decline against USD, weighed down by a number of factors including the Chinese real estate sector crisis, Australia-China tariff wars and an aggressive rate hike cycle by Fed.

In 2021, the AUD has seen intense weakness against the USD. The US dollar index (DXY), which tracks the performance of the USD against a basket of major currencies, has risen to its highest level in 20 years on the back of aggressive interest rate hikes from the US Fed.

On 14 July, the AUD fell to its lowest since June 2020 against the USD to trade at about 0.668.

As of 6 September 2022, AUD/USD was trading at about 0.679, down over 11% in year-to-date (YTD) terms.

When compared to major currencies other than the USD, the Aussie has fared comparatively well in 2022. AUD/EUR has gained about 8% YTD, AUD/JPY has increased over 20% YTD and AUD/GBP has added nearly 9% YTD, as of 6 September 2022.

About AUD: Australian dollar vs global peers

The Australian dollar or “Aussie” is the national currency of Australia, and is issued by the Reserve Bank of Australia (RBA). The RBA is Australia’s central bank. It determines the nation’s monetary policy, manages gold and foreign exchange reserves and issues the nation’s currency.

According to the RBA, Australia has a floating exchange rate which means that AUD’s exchange rate is determined by the demand for and supply of AUD in the foreign exchange market.

There are a number of factors that affect the demand and supply of a currency in the market. 

Interest rates

Interest rates are key drivers of both supply and demand of currencies in foreign exchange markets. To be more specific, the interest rate differential, which is the difference in interest rates between economies, is key in determining foreign exchange rates.

“If Australian interest rates increase relative to interest rates in the US, Europe or Japan, Australian assets that pay interest (such as government bonds) become more attractive to foreign investors, as well as Australian investors that may invest overseas,” said the RBA

International trade

International trade is another important driver of demand for a nation’s currency. Growth in a nation’s exports is generally associated with appreciation in its currency. Meanwhile, imports may require a nation to obtain foreign currency to pay oversea sellers.

The Australian dollar is commonly referred to as a commodity currency because of Australia’s large share of commodities such as iron ore, natural gas and agricultural products in its exports.

Healthy commodity prices also incentivise exporters to invest in expanding their production capacity. The capital needed for these investments typically flows into Australia from overseas, supporting demand for the nation’s currency.

“During the mining investment boom, a very large increase in commodity prices from the mid-2000s through to 2013 led to large inflows of foreign investment to help expand the production capacity in Australia’s resources sector. The Australian dollar appreciated significantly during this period, reaching a record high of A$1.10 against the US dollar in 2011,” the RBA explained.

Inflation

Prevalent inflation rates and prices of goods and services affect foreign exchange rates in cyclic adjustments based on demand. For example, higher prices for goods and services in Australia relative to the same goods and services in another nation will make Australian goods and services less attractive.

Lower demand for Australian goods and services will lead to depreciation of AUD. However, a lower value for AUD will lead to lower expenses for foreigners who can now purchase goods and services in Australia at a bargain price.

According to the RBA, short-term factors like risk sentiment and speculation affect the value of the Australian dollar on a day-to-day basis. The risk sentiment of the market could be based on the economic growth outlook for Australia. 

The RBA added that despite AUD having a floating exchange rate, the central bank can choose to intervene in foreign markets if the market is deemed to trade in a “disorderly or dysfunctional” manner where the number of sellers far exceeds the number of buyers, or vice versa.

AUD drivers: Five straight months of rate hikes fail to lift AUD

RBA’s monetary policy path in 2022 could be critical to the AUD forecast for the rest of the year. On 6 September 2022, the RBA implemented its fifth rate hike in row between May and September to take rates up to 2.35%.

Up until May, the RBA had refrained from tightening its monetary policy despite several of its international peers, including the Fed, embarking on their first rate hike cycle in years in order to tame rising inflation.

April saw AUD lose 5.6% against USD, its biggest monthly loss in over two years, after the Fed kick-started its rate hike cycle with a 25 bps rise in mid-March while the RBA continued to maintain its near-zero cash rate.

The RBA changed its stance in May and lifted cash rates from 0.1% to 1.85% with four consecutive hikes between May and August, which included three 50 basis points (bps) hikes. On 6 September, RBA hiked rates by another 50 bps as the central bank reiterated its commitment to push inflation back to its target range.

David Plank of ANZ Research said that Australia's cash rate is expected to be above 3% by the end of 2022, indicating more rate hikes. However, Plank added that in his opinion, another 50 bps rate hike in 2022 was unlikely.  

AUD drivers: Australia inflation highest since 1990s

The RBA has become increasingly wary of the high inflation in Australia. The RBA had hoped that supply-side pressures would ease, which would have allowed the central bank to maintain its accommodative policy beyond 2022 as previously anticipated.

The change of tone was evident in the monthly statement from RBA governor Philip Lowe in August 2022.

Gone was the language from July that referred to Australia’s inflation being “not as high as it is in many other countries”. Instead, Governor Lowe referred to inflation in Australia as “the highest it has been since the early 1990s” in the RBA’s board meeting on 2 August 2022.

The RBA raised its 2022 consumer price index (CPI) forecast to 7.75% from 6%. The central bank saw CPI inflation over 4% in 2023 and around 3% in 2024. The forecast figures are above RBA’s inflation target range of 2% to 3%.

The latest quarterly headline inflation report revealed annual CPI inflation increased to 6.1% in the June quarter due to higher dwelling construction costs and automotive fuel prices. 

The September quarter CPI report is expected to be published on 26 October 2022.

AUD drivers: Analysts favour safe-havens on economic slowdown fears 

Along with raising the inflation forecast for the year, the RBA also lowered Australia’s gross domestic product growth forecast to 3.25%, down from 4.25% for 2022, and cut its GDP growth forecast for the following two years from 2% to 1.75%.

It is too early to say whether the Australian economy is weakening. The trade balance reported on 4 August 2022 showed exports rose 5.5% in June, boosted by gains in precious metals and industrial metal exports. The balance of goods and services saw its fourth straight month of increase in June.

Madeline Dunk, an economist at ANZ Research, struck a cautious tone and said: “How much higher can the surplus climb? We think we’re near the peak.”

Commodity prices have eased since their peak in early 2022. Preliminary estimates of the RBA index of commodity prices for August indicated that the index decreased by 2.5% on a monthly average basis. The index had posted a monthly fall of 7.7% in July.

With the threat of recession looming in many economies, diminishing demand outlook for commodities coming into the purview, multi-national bank HSBC said risk-on currencies like AUD could underperform safe-haven currencies like USD and JPY going forward.

Looking forward: Australian dollar forecast for 2022 and beyond

Economists at ING Think held a bearish view in their Australian dollar forecast and called the commodity currency ‘vulnerable’. The economic think tank added the September 50 bps rate hike by the RBA was “no game-changer” for AUD.

“A switch to 25bp rate increases now looks possible given the high frequency of RBA meetings, although that may be read as a dovish signal by markets and force some dovish repricing along the AUD curve,” said Pesole of ING Think.

CIBC Capital Markets’ Australian dollar forecast for 2022 saw the AUD/USD exchange rate at 0.67 by the fourth quarter of the year.

Westpac Institutional Bank’s long-term AUD prediction expected the AUD/USD pair to trade at 0.73 in December 2022 and at 0.75 by March 2023.

WalletInvestor’s algorithm-based Australian dollar forecast for 2025 saw the AUD/USD exchange rate closing the year at 0.72. WalletInvestor did not give an Australian dollar forecast for 2030.

TradingEconomics expected the Australian dollar to be priced against the US dollar at 0.63457 in one year. 

Besides the AUD/USD forecast, the data provider gave price targets for EUR/AUD and GBP/AUD as of 4 August.

According to its EUR/AUD forecast on 6 September, TradingEconomics said the Euro to Australian dollar could be priced at 1.48920 in one year’s time. Its AUD/GBP forecast suggested the Aussie could trade at 0.58221 against the British pound in one year.

Note that analysts and algorithm-based Australian dollar forecasts can be wrong. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence. Remember that your decision to trade or invest should depend on your risk tolerance, expertise in the market, portfolio size and goals, and never trade money that you cannot afford to lose.  

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Further reading

GBP/AUD forecast: Stagnant UK growth, persistent inflation put sterling on back foot

GBP/USD and EUR/GBP analysis: BoE hikes but recession looms